Set forth below is the text of a comment that was recently posted to the discussion thread for another blog entry at this site:
Your long response shows that you know that you are wrong. Shiller told people not to use CAPE for timing (but you won’t listen). If he thought CAPE could be used for timing (short term or long term) he would have said so. Don’t put words in his mouth. Shiller told people to stay in the market (just like he did). You didn’t agree. You are clearly not on the same page.
Shiller said in July of 1996 that investors who were sticking with their high stock allocations despite the sky-high CAPE value that applied at the time would live to regret it within 10 years. That was clearly a recommendation that people with high stock allocations lower them until prices became more reasonable. It was a recommendation to time the market. It wasn’t a recommendation to engage in short-term timing. There is nothing in Shiller’s research that supports short-term timing. But it was a recommendation to practice long-term timing.
Lots of other big names in this field have recommended long-term timing. Wade Pfau has recommended long-term timing. In fact, he told me that he was practicing it with his own portfolio. And he co-authored a paper with me that showed in great detail that long-term market timing has been providing investors with results far superior to those provided by Buy-and-Hold for as far back as we have records of stock prices. Rob Arnott has recommended long-term market timing. Carl Richards has said that my work advocating long-term market timing has “huge value.” Even John Bogle has said that there are six times in an investor’s lifetime when it would make sense to change his stock allocation, three times when it would make sense to lower it because prices are too high and three times when it would make sense to increase it because prices are too low. That’s market timing and that’s the king of Buy-and-Hold saying that it makes sense. There are many people who are aware of the strong support for long-term market timing in the last 38 years of peer-reviewed research in this field.
All of those who believe that long-term market timing works and is required for investors who want to keep their risk profile roughly constant over time do not agree on precisely how long-term market timing should be practiced. That’s why we need a national debate on these matters. We need to hear everyone’s sincere opinion. And we need to ask questions about the various possibilities advanced. We need to learn. That’s what it comes down to. Shiller published his “revolutionary” research findings 38 years ago and the Buy-and-Holders have been engaging in criminally abusive practices to stop people from discussing their implications ever since. That needs to stop so that we can all learn what works best in all of the various circumstances that can turn up.
If Shiller had issued a clear statement saying that he does not think that long-term market timing works, you would share it with us. I have seen a statement in which he said that he used to think that timing based on CAPE worked but that he no longer thought so. That certainly cuts in your direction but it was not as clear a statement as you are suggesting it was. We need to ask Shiller to discuss that opinion in a place where he can be questioned as to precisely what he meant by it.
I believe that he was referring to his 1996 prediction, which failed. I believe that he is embarrassed by that prediction and he wanted to show that he learned something from the experience of making a prediction that did not play out. There are cautions that need to be kept in mind when practicing long-term timing; Shiller certainly believes that and I certainly believe that. But I don’t think that Shiller was saying that stock investing risk is constant. Shiller’s life work shows that stock investing risk is VARIABLE. If valuations affect long-term returns, as Shiller showed is the case, then stock investing risk VARIES with changes in CAPE levels. If that is so, then the investor who wants to keep his risk profile constant MUST adjust his stock allocation in response to big changes in valuations.
Do you believe that, if asked, Shiller would say that the safe withdrawal rate in January 2000 was 4 percent? I sure do not. That was the issue that I raised in my famous post of May 13, 2002. I asked a question: Should we be taking valuations into consideration when calculating the safe withdrawal rate? If Shiller’s research is legitimate, then we MUST do that or we will get the numbers wildly wrong and hurt people in very, very serious ways.
I would bet $100 that, if Shiller was asked, he would say that the safe withdrawal rate is not 4 percent at all CAPE levels. That is very important. We could prevent millions of failed retirements by getting that information out to people. We all should be doing everything we can to get a national debate launched and to get the information out to people that they need to be exposed to. Even those who end up sticking with a Buy-and-Hold strategy will end up learning from the experience.
I do not believe that Shiller and I are on the precise same page re HOW to engage in long-term market timing. He has made a number of statements in which he has said that he hopes to be able to avoid the worst effects of the coming price crash (he has said on numerous occasions that he believes a price crash is coming because prices are so insanely high) by watching for “indicators” and getting out of stocks at just the right moment. That’s short-term timing. Shiller’s research does not support short-term timing but he has made statements indicating that he intends to employ it himself to at least a limited extent. I think that he is on the wrong track re that one. So, no, we are not on precisely the same page.
Shiller has also indicated that he employs somewhat sophisticated strategies in trying to avoid the worst effects of the price crash that he believes is on the way. He looks for markets that are better priced at the moment than the U.S. market. That can work. John Walter Russell did some research on whether it is possible to avoid the effects of overvaluation in the broad U.S. market by investing in better-priced segments of the U.S. market or in non-U.S. markets. Doing something like that is still “timing.” If you change the types of stocks that you own because of a price that applies at a certain time, you are timing.
I am 100 percent in favor of the exploration of those sorts of strategies. I don’t personally write about them because I write for the typical investor and I don’t think that those strategies are suitable for people who are not willing to put the time or effort into studying things enough to make such strategies work. Also, my aim is more to get the debate launched than it is to advance specific recommendations that I advertise as the be-all-and-end-all answer for everyone. I don’t believe that knowledge has advanced enough in this area for anyone, Rob Bennett or Robert Shiller or anyone else, to be offering perfect final solutions to the investing problem. We are all still on an earlier point on the learning curve than the point at which that sort of thing would become possible.
Shiller and I are on the same page re the core questions — valuations affect long-term returns, stock investing risk is not constant but variable, investors who want to maintain constant risk profiles MUST make some adjustment to big valuation shifts, the safe withdrawal rate is a number that is sometimes higher than 4 and sometimes lower than 4. I don’t get the sense from his public comments that we are on precisely the same page re how to implement long-term market timing. But of course I know very little about what Shiller believes about how to implement long-term market timing because this is the forbidden question. This is the thing that we all need to debate and that debate is still being stomped out to this day.
What do you think Shiller’s reaction would be to the peer-reviewed research paper that I co-authored with Wade Pfau? I think it would be very positive. I think we should ask him. We should lift the Ban on Honest Posting at every site on the internet and make him feel comfortable expressing his views on this subject in detail and then ASK HIM. We could all learn a great deal by doing that. Including Shiller. Because he would get feedback on his reaction to the paper from Wade and me, which would help him as much as hearing Shiller’s reaction would help Wade and me come to a better understanding of these terribly important matters.
Have you stopped to consider how crazy it is that Shiller has never been asked to comment on the paper that I co-authored with Wade? That is in-freakin’-sane! I mean, come on. Our paper makes numerous bold assertions (all backed by the historical return data) about how to implement Shiller’s “revolutionary” (his word) research findings. Every investor on the planet would benefit from knowing what Shiller thinks about our paper. We should all be doing everything in our power to make him feel 100 percent comfortable talking about these matters in pubic and then get about the business of asking the man some darn questions.
That’s my sincere take, Anonymous. I naturally wish you all good things.
Rob
‘Shiller said in July of 1996 that investors who were sticking with their high stock allocations despite the sky-high CAPE value that applied at the time would live to regret it within 10 years.
You told me 10 years ago that I would lose half of my money. In those 10 years, it has more than tripled.
This is the fourth time in the history of the U.S. market in which irrational exuberance has taken stock prices to crazy high levels. On each of the three earlier times, the irrational exuberance eventually was transformed into irrational depression and the CAPE value dropped to 8 or lower. That would be a 75 percent drop from where we are today.
If you started with $100 and that became $300, a 75 percent price drop would take you to $75, less than what you started with. Plus you lost years in which you needed to be funding your retirement account.
If you could know in advance when the price drop was coming, you could just sell at that time and avoid it. But short-term timing doesn’t work. So the sensible thing to do (in my view!!!) is to lower your stock allocation in response to big price increases in an effort at keeping your risk profile roughly equal over time.
I wish you all good things, in any event, dear friend.
Rob
What you should have said is the following: “I was wrong”.
Okay, Anonymous.
I do wish you all good things, in any event.
Rob
you wrote a long posting about how someone should ask shiller a question. well, gee, why don’t you just ask him? what’s stopping you?
I have written to Shiller.
There was one occasion when John Walter Russell and I were working on a calculator and John sent him an e-mail asking about him about how he developed his data-set. Shiller responded to that. There was at least one other occasion (I think there might have been two) in which I sent an e-mail to Shiller letting him know about the problems that I have experienced with you Goons. He did not respond to those.
That’s the problem. That’s why we are in the mess that we are in today. Shiller’s discovery that valuations affect long-term returns (that there is precisely zero chance that a Buy-and-Hold strategy could ever work for even a single long-term investor) was not the first breakthrough in the history of scientific investigations. But it is the only one that I know of that has been largely ignored for 38 years. In ordinary circumstances, you would expect that everyone on the planet would be rushing to ask Shiller questions about the implications of his findings. Every last one of us needs to know how stock investing works. But in this case it’s not only that not everyone is asking Shiller questions. Shiller actually goes out of his way to avoid discussing the implications of his research. There is not one word of practical how-to advice in his book. Huh? What the f?
Shiller leaves out the how-to stuff because that is the stuff that enrages the Buy-and-Holders. We should have enjoyed a national debate on this stuff shortly after he published his “revolutionary” (his word) research findings, in 1981. We didn’t see that. I think that what happened is that as a society we experienced cognitive dissonance. The change in going from an understanding that the market is efficient (that market timing does not work) to an understanding that valuations affect long-term returns (that long-term market timing is REQUIRED for those seeking to keep their risk profile roughly constant over time) was so big that we just couldn’t let it in. So we entered this strange Twilight Zone world where for the first time in history we knew intellectually how stock investing works but in which we did not permit ourselves to talk about what we knew so that for practical purposes most of us continued doing the OPPOSITE of what works (the Buy-and-Holders not only do not encourage long-term market timing, they discourage it — in fact, they engage in criminal acts to block millions of investors from learning how important it is to exercise price discipline when buying stocks).
As the length of the cover-up has grown, the Buy-and-Holders have become more and more nuts about making sure that it remains in place. Now we are in a situation where it is likely that a good number of Buy-and-Holders will be going to prison when the national debate is launched. People who are at risk of going to prison are highly motivated to block discussions of the peer-reviewed research. As you know.
Shiller would of course be 100 percent happy to share everything he knows and thinks about the far-reaching implications of his research. He published the research to help people. And he needs to answer people’s questions about it to help people to the fullest extent possible. But he needs to know that the discussions that follow will be conducted pursuant to the laws of the United States. He needs to know that there are not going to be any death threats or any demands for unjustified board bannings or any acts of defamation or any threats to get academic researchers fired from their jobs. He needs to know that as a society we have buried all this intimidation stuff ten-thousand miles in the bottom of the ocean. For obvious reasons. Anyone who has seen any of what has gone on at our boards and blogs over the past 17 years will have no difficulty understanding where Shiller is coming from re that one.
When we see an article on the front page of the New York Times talking about all of the financial fraud stuff that has been stopping the national debate from taking place for 17 years now, Shiller will feel comfortable speaking out on hundreds of critically important issues. When we see prison sentences announced for you Goons, Shiller will feel comfortable speaking out. When I receive my $500 million settlement check, Shiller will feel comfortable speaking out. When Wade Pfau is awarded a Nobel prize for the peer-reviewed research that he co-authored with me showing that “Yes, Virginia, Valuation-Informed Indexing works!”, Shiller will feel comfortable speaking out.
We need to speak out as a society letting all interested parties know that the coast is clear to launch the national debate. We want to have it. We know that we need to have it. We wouldn’t have reviewed Shiller’s book in all of the top publications if we didn’t want to have it. We wouldn’t have awarded Shiller a Nobel prize if we didn’t want to have it. We wouldn’t have seen thousands of our fellow community members express a desire that honest posting on the last 38 years of peer-reviewed research in this field be permitted at every discussion board and blog on the internet if we didn’t want to have it.
We want to have that national debate and we don’t want to have it at the same time. We want to have it because it would teach us so many important things about how stock investing works. And we don’t want to have it because we understand on some level of consciousness that we are going to learn when we have it that our portfolios are not worth what we were led to believe they were worth during the Buy-and-Hold Era. Our intellects tell us that we need to have the debate. Our Get Rich Quick urges tell us that having the debate would ruin everything. As of this moment in time, our Get Rich Quick urges are remaining dominant.
The question is whether that will continue to be the case after the next price crash. Once our portfolios are priced at their real value or at something less than that, what the heck good does Buy-and-Hold do anyone? At that point, we will be able to see with our own eyes that Buy-and-Hold doesn’t work. So why would we not be willing to have that national debate over the last 38 years of peer-reviewed research in this field? I believe that the debate will go forward at that time.
Shiller will be answering questions. And thousands of other good and smart people who have been intimidated out of coming forward during the Buy-and-Hold Era will be answering questions. It will be a blast. I wish that this had all gone forward on the afternoon of May 13, 2002. That was my vote. My vote doesn’t always win the day. Perhaps you’ve noticed.
Rob
“There was one occasion when John Walter Russell and I were working on a calculator and John sent him an e-mail asking about him about how he developed his data-set. Shiller responded to that. There was at least one other occasion (I think there might have been two) in which I sent an e-mail to Shiller letting him know about the problems that I have experienced with you Goons. He did not respond to those.”
Doesn’t that speak volumes? When someone sends a rational email, they get a response. When someone sends an email that is not rational, they are ignored.
I think that it is 100 percent rational to want to get the safe withdrawal rate right, Anonymous.
A lot of the people who posted at the Motley Fool board had become friends of mine as a result of our many interactions. Most of those people believed that Greaney’s retirement study was a legitimate piece of research. The errors in his study hurt those people in very, very serious ways.
My sincere take.
Rob
We need to address the financial fraud stuff and the intimidation stuff. We cannot move forward until we do that. For so long as the financial fraud stuff and the intimidation stuff continue to work, the Buy-and-Holders are going to continue to turn to that sort of thing.
Shiller doesn’t feel comfortable calling out the Buy-and-Holders (a lot of whom he greatly respects and has friendships with) re the financial fraud stuff and the intimidation stuff. I get it. I didn’t feel comfortable doing that myself for a long time. I didn’t start talking about prison sentences for you Goons until your acts of extortion against Wade Pfau. Those didn’t take place until nine years after I ventured forward with my famous post of the morning of May 13, 2002. So I get it loud and clear.
But the reality remains that we cannot move forward as a society until all the stuff that has happened is out in the open. People need to understand why there has been a 38-year delay in the launching of the national debate re Shiller’s “revolutionary” (his word) research findings. That couldn’t have happened without lots of criminal stuff going down. I mean, come on
And the longer that we go without talking about the criminal stuff, the more of it we see. I am 100 percent certain that John Greaney didn’t post his retirement study at his site with the thought that someday his “defense” of it would be leading to a prison term for him and his friends. He saw that lots of others were talking about the 4 percent rule and figured that he would get in on the game. He based his study on the Trinity study. That was peer-reviewed research. In ordinary circumstances, basing a study on an earlier study that was published in a peer-reviewed journal would be a pretty darn safe thing to do. Greany got caught up in something a lot bigger than he realized.
Are we being kind to Greaney by failing to point out the error in his study? That’s the question that people like Shiller need to be asking themselves. I see nothing kind about it. It is cruel to pretend that we see a valuation adjustment in that study and to fail to speak up about the criminal acts because failing to speak up just means that Greaney’s error ends up hurting more people and his prison sentence ends up being longer than it would have been had people spoken up at the appropriate time. If Motley Fool had given Greaney the boot in June of 2002, as I suggested, Greaney wouldn’t be going to prison at all. He would have been banned for a few months and then I would have put up a post recommending that he be permitted to return and everyone would have agreed and that would have been the end of it. A better result? I sure think so.
Talking about the financial fraud and the intimidation tactics is an ugly business. There’s no question about it. It’s a very unpleasant business. But the reality is that we didn’t always know how stock investing works and some of us got on the wrong track for a long time as a result and now we need to sort things out so that we all live better lives in the future. There have been criminal acts and they don’t go away by us pretending that they did not take place. So we need as a society to acknowledge them and to work out what to do about them.
Is there a place for charity in our deliberations? I sure think so. But there is nothing even a tiny bit charitable in going along with further delays. That’s the cruelest possible way to proceed. We need to get all of this stuff out in the open, be as charitable as we can possibly be when doing it, and then move forward into a brighter future. Shiller has a role to play in helping us all to do that and so do thousands of others who until now have been reluctant to speak out or who have been wiling to speak out only in a tentative way.
That’s my sincere take, Anonymous. I naturally wish you all the best that this life has to offer a person.
Rob